Nestle looking to expand portfolio with Chinese confectionary manufacturer, Hsu Fu Chi International

Global food giant, Nestle, is reportedly in discussion over a $2 billion acquisition deal with Hsu Fu Chi International, a leading Chinese confectionary and baking company.

It is thought that poor growth in home markets has triggered Nestlé's interest in the emerging regions, particularly given that sales of Nestle products in China increased by 15% in 2010 to reach SF2.8 billion. An acquisition would help Nestle move towards its target of achieving 45% of its sales from emerging markets in 2020.

Hsu Fu Chi makes snack and confectionary products in Dongguan, Guangdong province. Products ranges include peanut based sweets, rice snacks and pop jellies. More than half the company is family owned, with around 15% controlled by private equity firm, Baring. Analysts indicate that Hsu Fu Chi has around 6% of the Chinese confectionary market, coupled with strong cash flow.

Share trading in the $2.6 billion company has been halted while discussions take place, although it should be noted that Hsu Fu Chi claims that it is also in talks with a number of other companies in addition to Nestle.

Chinese acquisitions are notoriously complex because of the Chinese government's approval process, and if a deal is accepted by Hsu Fu Chi, it could take a long time to complete. A Coca-Cola bid for drinks company China Huiyuan was rejected in 2009, and it took Diageo over a year to increase its share holding in spirits firm, Sichuan Shuijingfang.

Both companies declined to comment further.

Author: Lee Marriott, Analyst